Drinks group Diageo has withdrawn from the race to acquire the second best-selling vodka in the world, Swedish state-owned Absolut, opting instead to sign a $900m (£460m) joint venture deal with family-owned rival vodka brand Ketel One.

Top-shelf, premium-priced vodka is one of the fastest growing spirits globally, consistently showing 20% annual sales gains in recent years.

The majority of sales come from America where Absolut is the market leader with 39% of the premium vodka category. With the might of Diageo's distribution network behind it, Dutch-made Ketel One is expected to emerge as a significant challenger to Absolut.

The brand, which remains almost unknown outside the US, sells 1.9m cases annually. Ketel One has a 14% share of US premium vodka, trailing behind Grey Goose; Skyy has 17% of the market, and Stolichnaya has 18%.

The Ketel One deal will transfer global rights to sell the brand to a joint venture company half owned by Diageo and half by the Nolet family who established the brand and have been distillers in the Netherlands since 1691. In recent years the Nolets have seen Ketel One sales buoyed up by demand for premium priced vodka, but last year's growth was below expectations.

The family is understood to have held exclusive talks with Diageo and believe the joint venture deal will allow them to share in the benefits of placing Ketel One within the powerful Diageo brand portfolio and US distribution network.

Commenting on Diageo's withdrawal from the Swedish government's auction of Vin & Sprit, makers of Absolut, Diageo chief executive Paul Walsh said: "We prefer to back the certainty of this transaction [with Nolet]. Although in volume terms it is not as significant, its potential for growth is greater." Absolut sells about 10m cases a year.

Despite owning Smirnoff - the world's best selling spirit with sales of 23m cases - Diageo has long coveted a premium-priced vodka label, seeing the kind of growth being enjoyed by some of its rivals.

Five years ago the group invented its own French premium vodka called Ciroc and has been marketing it heavily in the US. After only muted success, Diageo last year signed an innovative endorsement deal for the brand with rap artist P. Diddy and hopes the deal will do for Ciroc what Busta Rhymes did for the cognac brand.

The addition of Ketel One to the Diageo drinks cabinet will not threaten the future of Ciroc, a Diageo source said, pointing out that it typically sells to a different customer, at $33 a bottle, compared with Ketel One at $22 a bottle and Smirnoff at $12 a bottle.

Despite concerns that a deal would be rejected by competition regulators, Diageo said it had chosen not to submit an indicative bid for Vin & Sprit ahead of the January 24 deadline. Diageo was privately confident US regulators would accept that its vodka brands operate in different markets because of their varying price points. The attitude of UK regulators was less clear.

Remaining suitors for Vin & Sprit are believed to include US firms Bacardi and Fortune Brands as well as France's Pernod Ricard. Several industry figures regard Fortune as the frontrunner because of an existing US distribution alliance between the Swedish and US firms which will have exclusive rights to sell Absolut in America for four years. The Alliance is majority controlled by a Fortune subsidiary Beam Global.

Rumours that Pernod had not submitted an indicative bid appeared to be denied two weeks ago when managing director Pierre Pringuet said the group was "firmly engaged with the process".

Diageo's joint venture with Nolet Distilleries is the second big US-focused deal Diageo has struck in as many weeks. Last week the group said it was acquiring upmarket winemaker Rosenblum Cellars, known for its Zinfandels, from founders Kent and Kathy Rosenblum in a deal valuing the Californian business at $105m.

Diageo will reveal its half-year sales next month, with analysts closely watching to see the impact of a slowing US economy on the drinks group's sales and profits. Despite fears in this regard, the latest industry data suggest spirit sales in the US continue to grow at about 3%. Within that, Diageo claims, premium-priced brands are showing much stronger growth.